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Power paradox: Gas export growth will hammer domestic food output

By RJ Whitehead , 22-Jul-2014

Power paradox: Gas export growth will hammer domestic food output

The recent surge in the price of domestic gas will lead to a long and deep malaise for Australia’s food production and processing industries, according to an authoritative cross-industry report on the impact of fuel costs on the country’s economy.

Compiled by Deloitte Access Economics on behalf of six industry associations, including the Australian Food and Grocery Council, the report warns of substantial job losses and industry shrinkage due to high fuel costs.

The study was prompted by the recent sharp growth of liquified natural gas (LNG) exports from Australia’s east coast, especially to Asian customers who are prepared to pay a higher price for the fuel. This, in turn, has driven domestic prices to reach parity with export prices—and in some cases tripled over a short period of time.

Asian demand

Before the rise in international demand for Australian LNG, domestic gas prices in Australia’s east coast were traditionally driven by local factors and have historically averaged around A$3-4 per gigajoule, the report highlighted.

However, prices paid by Asian customers have typically been considerably higher. This is because Asian countries such as Japan, China, South Korea and Taiwan have traditionally imported LNG under oil-linked contracts. With oil prices rising to upwards of A$100/barrel, LNG prices have also risen and are currently around $14-16/GJ.”

Charged with making sense of the impact this will have on the country’s manufacturing, mining, transport and agriculture industries, the report’s authors have called for urgent gas market reform and greater production to cushion the impact of rising gas prices across eastern Australia.

Under current policies and realistic gas price forecasts, Australia’s manufacturing output will contract by A$118bn (US$111bn) over the next seven years, with 14,600 manufacturing jobs under threat, the report notes. 

In a chilling prediction for farmers, the agricultural segment alone will contract by A$4.5bn (US$4.2bn), with Queensland, New South Wales and Victoria hardest hit.

Australian Food and Grocery Council chief executive Gary Dawson said in such a trade-exposed sector, Australian producers had limited or no capacity to pass through higher utility costs.

Food and grocery processing is the lifeblood of many regional economies, and higher gas costs have a direct impact on the profitability and competitiveness of food companies

If a food processing plant shuts down there is a direct flow on effect to farmers supplying that plant when they lose their key customer,” Dawson said.

Deep irony

An anticipated fall in overall manufacturing output of 3.61% by 2020-21 will be significantly higher than projections associated with the recent repeal of the carbon tax, although this could be mitigated if the upstream domestic gas market were more competitive, the authors argued.

Innes Willox, chief executive of the Australian Industry Group, pointed to the irony that bringing Australia's abundant gas supplies to market could have such a damaging effect on the country's manufacturing sector.

Gas exports should be pure good news for Australia. However, the strong benefits for investment and export earnings come with serious side effects for domestic manufacturing: tight supply and surging prices. Without reform, our rich energy reserves will no longer contribute to Australia’s competitiveness.

We need both a growing LNG export industry and a diverse industry base with a strong manufacturing sector. We need action on two fronts – get more gas flowing, by replacing blanket bans on gas production with strong but workable regulation; and reform the market that gas is sold in to boost competition and transparency,” Willox said.